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July 10, 2012

LIBOR Manipulation May Have Spanned Decades

Barclays chairman testifies in Britain; survey shows many bankers see misdeeds as vital to success in finance

Paul Tucker, deputy governor of the Bank of England (BoE), testified before Paliament on Monday. On Tuesday lawmakers got their chance at Marcus Agius, Barclays chairman. Meanwhile, reports of decades-long rate manipulation surfaced and a survey of Wall Street executives indicated that a surprisingly high number believe that misconduct is not just acceptable behavior, but a key to success.

Reuters reported that Tucker denied any suggestions that he was pressured by lawmakers to egg on banks in a manipulation of LIBOR and that in fact he was unaware of any such action on the part of financial institutions. In his testimony before the House of Commons Treasury Select Committee, Tucker was quoted saying, "This was a cesspit. We were not aware of it, other than what is starting to come out in these investigations. We didn't have any knowledge, I didn't have any knowledge."

Tucker was alleged in a note released by Barclays to have commented on the Libor rate in a way that allowed misinterpretation by former Chief Operating Officer Jerry del Missier that manipulation of the rate was acceptable to avoid a panic in the marketplace. Del Missier stepped down last week.

In a MarketWatch report, Tucker said of the conversation referred to in the note, “The last sentence gives the wrong impression. It should have said something along the lines of ‘Are you, the senior management of Barclays, ensuring that you are following the day-to-day operations of your money market desk? Are you ensuring that they don’t march you over the cliff inadvertently by giving signals that you need to pay up for funds?’”

He then said he had “absolutely not” offered any encouragement to any bank to misstate its LIBOR submissions, and added, "Such collusion [among the banks] would never have occurred to me until the revelations of the last few weeks."

"Banks and many other industries went into the financial crisis with a model of pay which was competitive as between the various different countries that they were operating in as a center,” he said, adding, "As the situation has come off, we have tried very hard to manage compensation down, we have tried very hard to achieve a far better balance as between the shareholders and between the employers. But there's a natural limit to how far we can go.”

Agius, who had defended former CEO Bob Diamond’s massive pay package at the bank’s annual meeting in April and was heckled for it, said in his testimony that the issue of pay was a balancing act: "If we reduce the payment of our people too fast, they leave, if we don't go fast enough, our shareholders vote us out, we have to somehow strike that balance … I do believe that we have done as much as we could in the circumstances, and I think we have a long way to go. I'm completely sympathetic to shareholders.”

The brazenness of the LIBOR manipulation at Barclays has driven considerable outrage in Britain and in Europe, where officials are working to define such activity as criminal with corresponding punishments. The Economistderided it on Saturday. In its report it compared a statement in a staff memo issued by Diamond to employees that “on the majority of days, no requests were made at all” to influence the rate to an adulterer claiming to be faithful most of the time.

The report contained something else disturbing as well: allegations that LIBOR manipulation has been going on not just for years, but for decades. Saying that the British Financial Services Authority (FSA) has identified the practice as going back to at least 2005, the report quoted traders who said instead that it has been quietly acknowledged for considerably longer than that.

“Fifteen years ago the word was that LIBOR was being rigged,” the report quotes an industry veteran involved in LIBOR. “It was one of those well-kept secrets, but the regulator was asleep, the Bank of England didn’t care and … [the banks participating were] happy with the reference prices.” Another financial professional was quoted saying, “Going back to the late 1980s, when I was a trader, you saw some pretty odd fixings … With traders, if you don’t actually nail it down, they’ll steal it.”

As disturbing as this may be, whistleblower law firm Labaton Sucharow released a survey on Tuesday that indicated a sizeable minority of Wall Street professionals believe that misdeeds are the key to success and are acceptable behavior.

In a survey of 500 senior executives in the U.S. and U.K., 26% claimed either observation or firsthand knowledge of workplace misconduct; 24% also said thought success in the financial industry could depend on illegal or unethical conduct. Among respondents, 16% would engage in insider trading if they thought they could get away with it, and 30% claimed compensation plans pushed them either to break the law or to dispense with ethical standards.

In a statement, Jordan Thomas, partner and chair of Labaton Sucharow's whistleblower representation practice, said, "When misconduct is common and accepted by financial services professionals, the integrity of our entire financial system is at risk."

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